Netflix adds 3.6 million subs, beats Q3 earnings expectations

Netflix avoided a rerun of last quarter's poor subscriber growth performance by blasting past expectations with nearly 3.6 million new subscribers.

The Los Gatos, Calif.-based Internet streaming video provider added 3.2 million new international subscribers and 370,000 new U.S. subscribers in the months of July-September. That far exceeds the company's forecast of about 2.3 million new subscribers, 2 million of them international and 300,000 in the U.S.

Some bullish Wall Street analysts had suspected Netflix of being conservative with its forecast, but few, if any, expected growth of more than 3 million total. Investors were also enthusiastic about the company's fourth quarter forecast of an estimated 5.2 million new subscribers from October through December.

Netflix (NFLX) shares skyrocketed on the news in after hours trading Monday, rising 20% to $119.78. Shares closed Monday down 1.65% to $99.80 and had been down nearly 13% for the year.

Interest in new original series such as Stranger Things, The Get Down and Luke Cage, along with the second season of Narcos, helped attract subscribers and keep churn to a minimum despite an ongoing monthly price hike of $2 for long-term members, CEO Reed Hastings said in a letter to shareholders. "When we have some big originals it definitely grows the business," Hastings said on a conference call with investment analysts after Netflix released its earnings.

For the third quarter, Netflix reported earnings of 12 cents, and profit of $52 million, blasting past the consensus of 5 cents and $22.3 million from analysts polled by S&P Global Intelligence.

Total revenue of $2.3 billion also surpassed the company's forecast of $2.16 billion, as well as analysts' expectations of $2.28 billion. Netflix had revenue of $1.7 billion a year ago.

Netflix's stock price activity is a mirror-image of what happened the last time the net TV company announced its quarterly performance. Shares tumbled 13% to $85.84 after Netflix said it had added about 1.7 million new subscribers between April to June — its lowest growth in two years.

Netflix now has 86.7 million total streaming members. And growth for the first nine months of 2016 -- 12 million new global members -- is equal to that in the first nine months of last year, Hastings said. "It's actually quite steady," he said, and it reflects "basically, a fundamental organic growth of this on-demand internet television."

For the year, Netflix expects "a moderate year-over-year decline in net adds" as all subscribers move to the higher $9.99 monthly subscription for the service's most popular offering.

Expect Netflix to continue to spend on original content. To increase its original content to more than 1,000 hours in 2017, up from more than 600 this year, the company will spend about $6 billion next year, the company said.

Developing and producing series such as Stranger Things internally, costs less over the long-term than licensing a series or a film, said Ted Sarandos, Netflix's chief content officer. Those projects aren't burdened by studio markup and Netflix controls the global licensing rights, he says. "To the extent we can do that, while it does require more cash up front to fund the development process, versus a studio who would take that on, we find it’s a great trade-off for cash," Sarandos said.

However, Netflix will continue to license programs and the number of shows might grow, even as those make up a lower percentage of overall programming, he said. "There isn’t a magic target," Sarandos said. "We want to have really great compelling differentiated programming for our members."

On other topics, Hastings said the company has no plans for another price increase and doesn't plan to crack down on password sharing. "(That) is something you have to learn to live with," he said. "There is so much legitimate password sharing (and) we are doing fine as is."

As for the oft-requested feature of downloading content, Hastings said, "we are open to it. It is something we are looking at. But we have nothing more specific to offer."

Netflix execs did not address rumors about possible suitors such as Disney or Apple.

This sets up the company for a solid 2016, says Scott Devitt, technology analyst with Stifel Financial Corp. He estimates Netflix could surpass its forecasts again -- adding 5.6 million new subscribers during this current quarter. “We believe Netflix will emerge from this un-grandfathering cycle with a strong setup for subscriber growth boosted by its expanding lineup of both global and local original content,” he said in an earnings preview note to investors.

Follow Mike Snider on Twitter: @MikeSnider


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